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WOOLWORTHS VIDEO



 

Stock Of The Day - WOOLWORTHS (HOLD)

Woolworths Limited (ASX: WOW) recently held its Investors Strategy Day at which it announced its sales for the 13 weeks of the third quarter of FY 2015. Australian Food Liquor and Petrol were down 3.3% to $11.8 billion from $12.2 billion in the same quarter of the previous year. Sales at the New Zealand Supermarkets were up 7.7% from $1.33 billion in the same period of the previous year to $1.43 billion. General Merchandise sales were down 21% at $907 million from $926 million in the previous year while hotel revenues were up 0.6% to $359 million from $357 million. Finally, Home Improvement sales grew by 21.7% to $455 million from $374 million in the previous year. Overall, total sales were down 1.6% from $15.19 billion in the same period previous year to $14.95 billion in this quarter.




Third Quarter 2015 Sales (Source: Company Reports)

The company explained that there had earlier been a wave of disappointment with regards to the Australian Food and Liquor sales in December 2014 and January 2015 but WOW later witnessed improvements in February and March 2015 as a result of the corrective action though April has been somewhat subdued. Liquor overall continues to report a robust performance. Petrol sales continue to be negatively affected as a result of the changed agreement with Caltex in which the company had decided to lower selling prices. The results of New Zealand Supermarkets are encouraging and showed that customers are responding to strong promotion and the continuing commitment to value. General Merchandise results continued to be negatively impacted by the Big W transformation and substantial early progress has been made on inventory clearance. Hotels are demonstrating positive revenue momentum especially in Victoria and Queensland.

These results demonstrate the strong market positions of the various businesses providing a platform for growth. In Food, the company is the largest supermarket operator in Australia averaging almost 15 million customers every week and the market share is almost 20% more than the nearest competition. Similarly, in the same category, it is the number one supermarket brand in New Zealand. It is the number one liquor business in Australia and the number two in market share in General Merchandise to the largest offering of online apparel in Australia and New Zealand. 330 hotel properties make it more than 3 1/2 times as large as its nearest competitor.


Statistics related to Customer Segment (Source: Company Reports)

The company has identified what it regards as six challenges in order to perform to full potential. These include regenerating momentum in Australian supermarkets, maintaining the performance in the liquor business, making significant progress on the road to profitability for Masters, speeding up the reset of Big W, becoming more competitive in the new environment by accelerating the lean retail model and maintaining discipline with regard to portfolio management and allocation of capital and resources. The lean retail model is expected to deliver more than $500 million of cost reduction across FY15-16.

For the 27 weeks ended 4 January 2015, the company reported, before significant items a 1.8% increase on sales (3.4% excluding petrol) of $32.4 billion. Net profit after tax at $1.38 billion was up by 4.7% and EPS at $1.10 per share grew by 4% over the prior half year. A fully franked dividend of $0.67 per share was declared for the half-year. After an exceptional charge of $148 million relating to a transformation provision for the General Merchandise business, net profit after tax of $1.28 billion was down by 3.1% over the previous year while EPS of $1.02 per share declined by 3.9% (i.e., after significant items).




Store Roll-out (Source: Company Reports)

The company has also provided an update on its progress against its strategic priorities. On extending its leadership in Food and Liquor, profit growth continues with EBIT growing by 7.3% on the prior half year because of investments for better prices through shelf price and promotional initiatives. The average price deflation for the half-year was 1.8%. More convenient access was provided to customers by way of new supermarkets and refurbishment of existing ones. On building new growth businesses, there has been progress on new offers for Home Improvement and the new Masters store format. The company has also consolidated its position as the largest online retailer in Australia.

Acquisitions included Hudson Building Supplies and Belmont Timber and Hardware increasing trade presence in New South Wales, Queensland and Victoria; and Summergate Fine Wines and Spirits, a leading wine and drinks distributor in China. The company has put in place enablers for new growth by way of state-of-the-art logistics and technology, and better understanding of its customers. Finally, portfolio transformation to maximise value for shareholders has been accomplished with the accelerated transformation of Big W as well as continued divestments of properties as and when opportunities arise.
 
As the half yearly results and the third quarter sales indicate, the company is just about holding its own in terms of revenues; and despite all the measures being undertaken, growth is by no means a given. In fact, unless there is an improvement in the overall economic environment, there is plenty of hard work ahead. The situation in the Masters Home Improvement business should worry investors but the losses are not going to last indefinitely and the business will either have to deliver or be shutdown. The heightened level of competition is only going to make things worse.
 

Share of Customer Wallet (Source: Company Reports)

We also note that recently, Wesfarmers’ owned Coles is able to take a bigger chunk of pie of the food and liquor market while WOW faces a drop in share. Further, the market views the strategy update as a way to proffering incremental changes (price matching strategy and not leading) and not a rock-solid stance to boost earnings in the long-term. The rate of rolling-out of supermarkets, strategy to outdo competition from Aldi and others, strategy to have better format for home improvement stores and so forth are few areas that need attention. It is also to be seen that how WOW will work out the proposal on its new pricing and value strategy to combat the impact from Coles and Aldi as claimed in its recent company updates. At the same time, absence of guidance for FY16 might reflect a financial flexibility for any change. Better capital focus may also turn the table around.


WOW Daily Chart (Source - Company Reports)
 
A great upside is, however, not seen until the company brings in a full-proof strategy for long term performance. We would recommend the stock as a HOLD at the current price of $28.58.